- Personal Finance»
- Managing Credit Cards & Payment Options
Repair Your Credit Profile
Know What's In Your Credit File
So you want to buy your first car?
Or maybe it's time to buy a house for your growing family?
These opportunities are exciting to say the least, it's also these times that knowing what your credit file contians is in your best interest.
Otherwise the dream car you feel in love with, or the house that's "just perfect" is not going to happen; plain and simple.
But if you know what your credit file(s) look like you have the ability to take control, fix it (if need be), and make sure that when you do apply for a new car or the perfect home no one will be able to stand in your way.
The Basics of Your Credit File
Things like your work history, your date of birth, your address, any open revolving credit cards you have or have had, student loans, etc. These "accounts" are referred to as trade-lines.
The credit bureaus have the ability to "tie" all the information together and create a number that basically defines you and your credit worthiness which is how they arrive at your personalized credit score.
Credit Score Range
Your credit score can range from 350-850+.
In the case of credit scores the higher the better.
If your credit score is 350-540 your chances of achieving your goal are slim.
However, if your credit score is 540- 600 or so your chances of succeeding are slightly better but you will PAY for a lower score by ways of higher interest rates.
If your credit score is in or above the 650 range assuming your income qualifies and your debt ratio is not through the roof you will succeed.
The Good, the Bad, and the Ugly
Those student loans that you "forgot" to pay back, you can bet there on your report like a big red X. That cell phone bill you, your best friend, or neighbor ran up and never paid for 4 years ago, it's about to rear its ugly head.
On the other hand your credit card that you’ve had for 3 years and have paid consistently on time every month is giving your score a boost at the same time. In essence "fighting" the bad credit.
There is hope for those past mistakes, as time passes from the last incident (the cell phone bill, for example) this will impact your score less and less. However the positive credit will continue to add points to your score as you continue to pay on time EVERY month. Let’s look at an example of how a low credit score can hurt you.
Young Credit Leaves Less Room for Mistakes
Of course it is important to note, that the credit profile of someone who is 60 will be much more "lengthy" then the credit profile of someone who is 22.. Thus leaving more room for error in the older population, but don't worry; the algorithm designed by the BIG THREE credit bureaus takes that into account too.
The Cost of a Low Credit Score
Let's use the purchase of our dream car as a scenario:
You walk into the dealer all excited, you've saved $3000.00 towards a down payment and today is the day. You walked in but surely you will be driving out as long as the numbers make sense and everyone agrees to the terms.
No big deal it's time to celebrate!
Not so fast, your "dream" car has a sticker price of $6000.00.
Is all hope lost?
Well that all depends.
The next thing your "trusty" salesman (which surely is an oxymoron) states is they have a finance company that can finance the other $3000.00 for you.
Yippee!!! You may drive away with your new car after all!
All you have to do is fill out a simple form that basically gives the finance company permission to "ask" the credit bureaus for that special number, (drum roll), YOUR CREDIT SCORE.
You will fill in your name, address, workplace, time on job, income, your social security number and anything else they feel is necessary to obtain this information (coincidentally this is the same way the credit bureaus get your information in the first place).
Typically, the salesman will come back within 5 minutes or so and let you know the decision.
It's all based on your credit score number.
Here is where your credit score comes into play. That number the BIG THREE credit bureaus came up with will dictate what your interest rate on what borrowing the difference will be. A low interest rates means you will have to pay back much less then a high interest rate.
Your interest rate will all be dictated by your credit score.
Back to purchasing our dream car....
Low Credit Score Scenario
If you have a low credit score the $3000.00 you need to make up the difference between what you have and what you need for this "dream car" will be at an extremely high interest rate (because your credit score tells people your "high risk").
So instead of paying back the $3000.00 you borrowed you'll be paying back closer to $5000.00. So the dream car just went up in price from $6000.00 to $8000.00 simply because you’re not as worthy as someone with a credit score of 650+.
High Credit Score Scenario
Now let's say your credit score is 700 (if this is you...why are you here?).
You can almost guarantee that you will not only be driving away with your new car but you will be paying close to the "sticker" price (remember $6000.00) for the car.
Will there be finance charges?
Of course the bank that loans you the money needs to make something off the loan but it will not "hurt" nearly as much as having a lower credit score will.
Know Before You Go!
The bottom line is that unless you know what is contained in your credit profile you have no knowledge of your chances in obtaining a reasonable interest rate for whatever your needs are.
In the financial world knowledge is key, know before you go.
Keep in mind that annualcreditreport.com allows you to “ask” for your credit report from the BIG THREE once a year at no cost to you.
Also remember that paying for your credit report from one of the agencies (Equifax, Experian or Transunion) will give you a much bigger picture as well as the “magical” credit score number that so many lenders rely on to look at and tweak should it be necessary to do so.
By investing a little time in your credit profile, looking at it for mistakes (they DO happen – A LOT actually), correcting errors, updating information, and keeping on top of your bills you will surely be driving your “dream car” to your “new home” in no time.